Houston Astros Ownership Files Fraud Lawsuit against Drayton McLane over Botched TV Deal

Houston Baseball Partners, LLC v. McLane Champions, et al., No. 201370769, Harris County, Texas

The wrangling over future broadcasts of Houston Astros games has finally come to blows as the Houston Baseball Partners, LLC ownership group, led by Jim Crane, has filed a lawsuit in Harris County, Texas alleging misrepresentation and fraud.  Specifically, the petition alleges that the Houston Regional Sports Network, of which plaintiff purchased a 40 percent stake, was fraudulently overvalued and that the subscription rates previously being sold by defendants were rejected by Time Warner, Direct TV and AT&T. 

           

“Ultimately, fans of the Houston Astros have been injured because Defendants’ misrepresentations leave plaintiff with an impossible choice: either accept the broken network as is, and deprive thousands of fans the ability to watch Houston Astros games on their televisions, or distribute the games at market rates and take massive losses out of the Houston Astros player payroll – thereby dooming the franchise for years to come”

The Astros had formed the network in 2003, in conjunction with the Houston Rockets ownership, and Comcast later purchased an equity stake in the network in 2010.  Comcast agreed to pay certain monthly fees based on the number of subscribers in a given month for each of several distinct geographic zones. 

Plaintiff claims that Comcast eventually agreed to an “inflated” Zone 1 base rate; however, Comcast retained a “most favored nation” right such that they could reduce their rates if affiliate distributors were not willing to contract at the premium Zone 1 rate.  These “inflated” rates were thereafter incorporated into the Comcast business plan that plaintiff relied upon in negotiating the purchase of the ball club and broadcast network shares in 2011.

In order to prove their case, Houston Baseball Partners will need to prove that the (1) inflated Zone 1 base rates overstated the projected profitability and ultimate value of the Astros’ stake in the network, (2) that these representations were materially false and misleading when they were made, (3) the defendants knew or should have known that the representations were false and misleading, (4) that the false or misleading representations were made with the intent of inducing plaintiff to execute the purchase agreement, (5) that plaintiff relied on these misrepresentations to their detriment, and (6) that plaintiff suffered damages as a result.

Fraud is difficult to prove and initially, it would appear that plaintiff will have some difficulty establishing that the inflated rates were misleading if they were being honored at the time of the purchase.  Presumably, the most favored nation status would have been examined during the due diligence process and the risks that accompanied such a provision would likely have been accounted for in the purchase price.

What is not clear at this point is the correlation between the Astros’ on field performance and the number of subscribers that pay to access the broadcast, especially in light of the dismal performance of the team in 2013.